One of the more oft-cited phenomena in the market is the Santa Claus rally, which if you’re a believer implies that you should plan ahead with stocks to buy that can benefit from this trend. Per Investopedia, the Santa Claus rally “describes a sustained increase in the stock market that occurs in the week leading up to Dec. 25.”
To be clear, “there seems to be some disagreement over whether these rallies happen in the week leading up to Christmas, or if it’s the week after Christmas until Jan 2.” Fundamentally, it’s not so much about Santa Claus but rather the underlying theory that can bolster stocks to buy. For instance, the winter season can bring out a festive mood, thus increasing bullishness.
This year, both technical indicators and fundamental undertones suggest that Jolly Old St. Nicholas may bring good tidings for investors: it’s just that the timing might vary. Nevertheless, if you’re flexible, these are the undervalued and/or underappreciated stocks to buy that can benefit from the Santa Claus rally.
| PFE | Pfizer | $49.45 |
| THO | Thor Industries | $85.77 |
| KLIC | Kulicke & Soffa | $46.10 |
| LCII | LCI Industries | $100.05 |
| MATX | Matson | $63.11 |
| MDC | MDC Holdings | $31.23 |
| GRVY | Gravity | $41.65 |
Pfizer (PFE)
Earlier during the height of the coronavirus pandemic, pharmaceutical giant Pfizer (NYSE:PFE) essentially represented a can’t-lose proposition. Offering a vaccine for Covid-19, many viewed Pfizer not only as a biopharma play but rather as a long-term economic catalyst. Fortunately and unfortunately, fears of Covid faded dramatically, resulting in relevancy loss for PFE. Still, it could also benefit from the Santa Claus rally.
For one thing, the mood appears to be brightening in the market, translating to a performance boost for Pfizer. True, on a year-to-date basis, PFE dropped 13% of equity value. However, in the trailing month, PFE gained almost 8%. It could gain more should the omicron variant of the SARS-CoV-2 virus spreads rapidly this winter.
Another factor to consider is Pfizer’s value proposition. According to Gurufocus.com, PFE rates as significantly undervalued. Currently, the market prices PFE shares at 9.9 times forward earnings. In contrast, the industry median forward price-earnings ratio is 15.5 times.
Thor Industries (THO)
One of the clear Covid-19 winners, Thor Industries (NYSE:THO) manufactures recreational vehicles. In addition, the company sells towable and motorized RVs through its subsidiary brands. Of course, when Covid-19 symbolized a mysterious and deadly disease, the idea of RVing appealed to health-conscious individuals. However, as pandemic fears faded, so too did Thor’s relevance.
However, the Santa Claus rally could make THO one of the contrarian stocks to buy again. True, THO dropped over 17% of equity value since its January opener. Nevertheless, it attracted near-term momentum, moving up over 8% in the trailing month. Part of the enthusiasm may again stem from the value proposition. Currently, the market prices THO at 4.2 times trailing-12-month (TTM) earnings, whereas the industry’s median PE ratio is 16.6 times.
In addition, the company enjoys a three-year revenue growth rate of 26.6%, better than the 93.5% of its rivals. As well, its free cash flow (FCF) growth rate during the aforementioned period pings at 24.6%. This ranks above 73% of the industry. Given Thor’s appeal to the higher-income crowd, THO could rise significantly on a possible Santa Claus rally.
Kulicke & Soffa Industries (KLIC)
Based in Singapore, Kulicke & Soffa Industries (NASDAQ:KLIC) may not be a household name stateside. However, that could change quickly, particularly among investors. While KLIC represents one of the hard-hit tech stocks – suffering a 28% loss on a YTD basis – it also benefitted from near-term momentum. In the trailing month, it’s up over 15%.
Fundamentally, KLIC should prove incredibly relevant. Per its public profile, the company is a leading provider of semiconductor, LED, and electronic assembly solutions serving the global automotive, consumer, communications, computing, and industrial markets. Unless you anticipate that these sectors will suffer a substantial loss of demand, KLIC should be able to keep on running.
On a financial level, KLIC draws intrigue because of its undervalued nature. Currently, the market prices KLIC at 6.7 times TTM earnings. In contrast, the industry’s median price-earnings ratio pings at 17.8 times. Should the Santa Claus rally materialize, it’s quite possible that discount-seeking investors may rush into KLIC.
LCI Industries (LCII)
LCI Industries (NYSE:LCII), which operates under the name Lippert is a leading, global manufacturer and supplier of highly engineered products and customized solutions, dedicated to shaping, growing, and bettering the RV, marine, automotive, commercial vehicle, and building products industries. At the moment, circumstances are a bit rough for LCII, which declined more than 36% YTD. Still, should the Santa Claus rally materialize, this is one of the names to consider.
Fundamentally, the wealth gap may benefit LCII. Usually, RVs and related industries such as boating cater to the rich. After all, they’re the only ones that can afford endeavors that really amount to money pits. Therefore, under a possible Santa Claus rally, investors may target LCII since its consumer base will be more resilient to economic shocks than consumers of more modest means.
On the financials, LCI Industries delivers with strong income statement-related metrics. For instance, its three-year revenue growth rate stands at 21.8% while its net margin is nearly 9%. Both these stats rank among the underlying sector’s top echelon.
Matson (MATX)
A company with a long history, Matson (NYSE:MATX) was founded in 1882. Its subsidiary Matson Navigation provides ocean shipping services across the Pacific to Hawaii, Alaska, Guam, Micronesia, the South Pacific, China, and Japan. Of course, with disruptions to the global economy, Matson printed a less-than-desirable performance, losing 28% of equity value this year.
Unlike other publicly traded securities, MATX did not benefit (yet) from the near-term sentiment lift. In the trailing month, shares are down more than 11%. Nevertheless, should a Santa Claus rally materialize, MATX would definitely belong on a list of stocks to buy. It all comes down to the financials.
According to Gurufocus.com, Matson features 10 good signs with no yellow or red flags. With everything that transpired this year, I can tell you straight up this status is a rarity. Among the factors that the investment resource identified as strong positives include stability in the balance sheet (via a high Altman Z-Score) and insider buying.
MDC Holdings (MDC)
As I’ve expressed in prior InvestorPlace articles, I’m not a big fan of housing-related investments. Generally speaking, I anticipate the sector fading. However, no one truly knows what will happen in the market. So, in case I’m wrong, contrarian investors may want to check out MDC Holdings (NYSE:MDC), a new home construction firm.
To be clear, MDC presents significant market risks. Since the beginning of this year, shares dropped over 41% in equity value. That said, the stock is starting to pick itself up. In the trailing week, it gained 1.7%, while in the trailing month, MDC moved up over 2%. If the experts are right about the Santa Claus rally, improved investor sentiment could handsomely reward MDC stock.
Financially, the underlying company presents a well-balanced picture. For instance, both its revenue growth rate and net margin rank among the underlying sector’s top half. In addition, it features a decently stable balance sheet. Finally, the market prices MDC at 3.6 times trailing earnings, which is considerably undervalued.
Gravity (GRVY)
Another less-known enterprise among American investors, Gravity (NASDAQ:GRVY) is a South Korean video game corporation. Among sector enthusiasts, however, Gravity garnered much attention due to its multiplayer online role-playing game Ragnarok Online. With a market capitalization of just under $290 million, prospective investors will need to be careful about GRVY.
Further, for all the enthusiasm about the video game sector, GRVY represents a poor performer. Since the start of the year, shares tumbled 39%. In the trailing month, the equity unit dipped more than 1%, reflecting a lack of near-term momentum. However, a Santa Claus rally could change this narrative very quickly.
Most prominently, Gravity features zero debt. While that’s not always a positive attribute, during this rough economic cycle, it’s one less distraction to worry about. In addition, the company enjoys solid growth and profit margins. Finally, GRVY is undervalued, priced at 7.5 times TTM earnings, contrasting with the industry’s median of 17.9 times.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.